David Prosser: Reform the tax system and deliver a decent pension for all

Devastating new research from Datamonitor could be the final nail in the coffin for the Government's ailing pensions policy.

Devastating new research from Datamonitor could be the final nail in the coffin for the Government's ailing pensions policy. The market analyst says stakeholder pensions, launched four years ago as the solution to the country's savings crisis, have comprehensively failed.

After a strong start in the year the Government launched stakeholder pensions, sales have fallen dramatically. The number of plans sold dropped by 6 per cent a year between 2002 and the end of last year. During a period when financial experts have repeatedly warned that people are not saving enough for old age, sales of the Government's flagship pension product have collapsed.

We shouldn't be surprised by this disaster. Stakeholder plans appealed to savers who were already contributing to pensions, because they were a low-cost version of older products. But they did nothing to address the fundamental reasons why people aren't saving enough.

One problem is that many people just do not have enough spare cash to save for the future. This group includes many younger workers, who are often earning low salaries or struggling to repay student loans. Women are also over-represented in the "can't afford to save" category.

There is an even larger group of people who can only afford to put by relatively small sums. These savers face another huge problem: the ridiculous complexity of pensions, especially the interaction between the state and private-sector systems.

Currently, the state pension rules mean modest savers lose out. While poorer pensioners are entitled to claim the means-tested pension credit, by saving for old age, they disqualify themselves from this cash. So, unless you're confident of comfortably putting by more than you would get from the pension credit, you might as well not bother.

Without reform of the state system, there is little hope of any improvement in private pension saving. It's therefore encouraging that Tony Blair this week backed the idea of an automatic state pension paid to everyone over a certain age - pensioners would qualify through a basic residency test, irrespective of the National Insurance contributions they had made. Less happily, he quickly pointed out that a universal pension would cost several billion pounds more than the current set-up. He warned the cost could be prohibitive.

There is one obvious way to pay for more generous state pensions. The tax reliefs available to savers who pay into private pensions cost the Treasury a staggering £19 billion a year. The money is meant to be an incentive to save, yet the vast majority of those who contribute to private pensions would be providing for their old age even without these tax breaks. Perversely, higher-rate taxpayers - who need the least help to save - get the most generous tax breaks.

There is nothing to stop us reallocating some of the cash currently being wasted on pension tax relief. It could be used to underpin a universal pension generous enough to enable us to do away with means-tested benefits for pensioners.

The transformation would be remarkable. Everyone could look forward to a decent basic income in old age - including those who can't afford to save for a pension. Those who could afford to put by extra would do even better, free from anxiety about losing access to complicated means-tested benefits.

* Car dealers' reputation as sharks may not be entirely deserved, but there's no doubt that they charge way over the odds for finance. Yet two-fifths of car-buyers still take the loan on offer at the showroom.

Analyst MoneySupermarket cites the cost of buying a Ford Mondeo. Drive away with Ford's own finance package, costing 15.1 per cent a year, and your new wheelscost £22,500. Buy with a cheap personal loan, at about 6 per cent, and you pay £20,200, saving more than £2,000.

Car-buyers think long and hard about a new vehicle, but then sign up in an instant when they're offered an expensive finance package. If you plan to buy a new motor, now that March's 05 plates are available, sort out a cheap loan before you set off for a test drive.

Do your homework to beat the banks

Britain's biggest banks have been quick to point out that a large chunk of their mammoth profits is made outside of this country. Of HSBC's £9.2bn profit unveiled on Monday, for example, only £2.6bn was generated here.

Even so, there's no getting away from the fact that the banks are doing very nicely out of us all. But while it's right to get cross when this exploitation is exposed, we often have only ourselves to blame.

For example, despite a two-year campaign from Which? to persuade people to switch current account, the biggest banks retain 70 per cent of the market. Similarly, Barclaycard remains dominant in the credit card sector, despite rarely offering the best deal. Too many of us automatically troop down to our local big bank, whatever our financial need.

Maybe a lack of financial savvy is to blame. On-line bank Egg has been testing the nation's financial IQ with relatively simple questions about interest rates and inflation. The average Briton scores a pretty dismal 56, out of a possible 120.

You can sit the test for yourself online at www.financial-iq.co.uk. Use the results to identify your weak spots and then do some homework.

It's your only option. The big banks may not enjoy being criticised for profiteering, but they won't be shamed into action.

The only effective way to force them to offer a better deal is to take your business elsewhere. And that means knowing how to work out when you are being ripped off.

d.prosser@independent.co.uk

Independent Partners: 10 top tips for retirement. Get your free guide here

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Recruitment Genius: Tax Assistant

    Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

    Recruitment Genius: Outbound Sales Executive - OTE £25,000

    £16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

    Day In a Page

    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
    America: Land of the free, home of the political dynasty

    America: Land of the free, home of the political dynasty

    These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
    A graphic history of US civil rights – in comic book form

    A graphic history of US civil rights – in comic book form

    A veteran of the Fifties campaigns is inspiring a new generation of activists
    Winston Churchill: the enigma of a British hero

    Winston Churchill: the enigma of a British hero

    A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
    Growing mussels: Precious freshwater shellfish are thriving in a unique green project

    Growing mussels

    Precious freshwater shellfish are thriving in a unique green project